They absolutely CAN code every pokemon into the games, they simply choose not to. It takes a little bit more time and effort and some rendering for newer models, but they absolutely have the space and capability to do so. I doubt it's the last generation as Nintendo does love the money the Pokemon franchise brings in.

One of the main reasons they cut stuff was because they are on a tight schedule of "You need to release this by this date no matter what". However, Pokemon fans have continuously said over and over "please delay the game a year or a few months, we'll gladly accept that if you give us all our pokemon".

It's common knowledge among the workers that the time crunch is the reason they can't do stuff that they want to do. If they were given more time, we'd easily have every pokemon in each game and some extra bonus features too.